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Predictions on Postage - 4/6/2010 -

Unfortunately, an increase in periodicals postage is staring us in the face for 2011. What's affecting postage prices, and what to association publishers need to know to prepare?

By Robert J. Lindsay

AT A MARCH 2, 2010 EVENT IN WASHINGTON DC, the United States Postal Service's (USPS) top management communicated that the USPS has reached a critical juncture.

Mail volumes have dropped from a high of 213 billion in 2006 to 177 billion in 2009. According to a study commissioned by the USPS, the projected figure for 2020 is 150 billion, even after factoring in historical long-term economic growth. The report provided a worst case of 118 billion. Moreover, first-class mail, the USPS's most profitable class, is expected to shrink from 48 percent of total mail volume (2009) to 35 percent in 2020.

This unprecedented decline in volume and mix is projected to produce a cumulative $238 billion shortfall by 2020 – obviously, an unsustainable course. Post Master General Jack Potter outlined an aggressive plan of cost cutting, rate adjustments, increased productivity, and an array of legislative and regulatory changes to avert this looming financial crisis.

The good news is that actions within USPS control could generate $123 billion in cumulative savings by 2020. Addressing the balance—$115 billion—would require immediate and significant help from Congress this year in the form of legislative and regulatory changes. Given that no bailout would be offered, such changes could include:

  • Restructuring USPS retiree health benefits payments in a manner comparable to other branches of the federal government and the private sector could save $5.6 billion per year.
  • Some relief may be found in the office of the Inspector General's estimate that the USPS has made $75 billion in overpayments to fund retiree pension benefits.
  • Adjusting delivery frequency from six to five days per week could reduce costs by $3 billion per year.
  • Amending current postal law to allow Consumer Price Index (CPI) inflation increases to be applied to the four major classes of mail as a single group as opposed to each class individually. (Note: Many pundits view this possibility as particularly onerous for periodicals.)

Impact on Periodicals

The current four-class system was originally created in the Mail Classification Act of 1879, when Congress defined periodicals (aka "second class”) to be mail which "disseminates information of a public character, or be devoted to literature, the sciences, arts, or some special industry, and having a legitimate list of subscribers”. Mail would be eligible for special reduced prices if it met periodicals requirements (e.g. printed sheets, regular frequency, etc.)

Fast forward to the Postal Reorganization act of 1970, mandating that postage prices for different classes of mail be based on the costs associated with meeting that class's service commitment. Despite all of the increases over the 40 years since then, the periodicals class still covers only 76 percent of its attributable costs, according to recent Postal Service calculations (though some major publishers and industry associations have challenged the USPS's formulas and methodologies for calculating periodical cost coverage).

The postal law passed in December 2006 has added to this dilemma by capping all postal service price increases to not exceed the CPI for a given year. For calendar 2009 the CPI is negative 0.4 percent, implying that prices cannot be raised.

Many observers believe that the USPS recognized—but pushed aside—the gravity of this coverage problem during the last 10 years, which were profitable if you exclude the special Congressional assessments for retiree health benefits. However, as mailers responded to the slowing economy, periodicals revenues were further reduced due to lighter weight magazines, increased drop-shipping, and reduced piece charges through offline co-mailing. Though periodicals represented only 4 percent of USPS revenues in 2009, the class accounted for nearly 17 percent of the mail weight handled; therefore, its cost-coverage issue is in the USPS's crosshairs.

While standing by his promise of no rate increase in 2010, Post Master General Potter affirmed a need to raise rates in 2011 per the emergency provision of the 2006 law. Speculation is that general increases are likely to be around 5 to 7 percent, with perhaps an additional 2 to 4 percent for periodicals.

If nothing changes in USPS computation methods, or in Congressional rejection of the value of subsidizing periodicals mail, expectations are that the next few years will bring continuing rate increases and/or changes to periodicals mail preparation rules to alleviate the cost-coverage problem.

Robert J. Lindsay is corporate director of postal affairs and business solutions for RR Donnelly. Association Media & Publishing thanks him for summarizing this important issue for our members,


 

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